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Free Cash Flow and Working Capital


Rajan (NA)     22 June 2020

Rajan
NA 
 54 points

| My Other Post

Dear All,

I have a basic doubt in calculation Free Cash Flow (for application under DCF). I am of the understanding that to derive free cash flow, Operating Income after taxes needs to be subtracted with Changes in Working Capital (Net Changes in Working Capital) and Capex.

Formula is: Free Cash Flow = Operation Income (after taxes) - Net Changes in Working Capital - CapEX.

For clarity, let's use the below example:

Operating Income after taxes = 100

Net Change in Working Capital = -25

Capex = 15

1)

a) FCFE = 100 - (-25) - 15 = 110 or b) FCFE = 100 - 25 - 15 = 60

Which would be the correct answer in based on the above example?

2) In case if the above example is changed as below:

Operating Income after taxes = 100

Net Change in Working Capital = 25

Capex = 15

a) FCFE = 100 - 25 - 15 = 60 or b) FCFE = 100 + 25 - 15 = 110

Which would be the correct answer in based on the above example?

 

Thank you,

Rajan

 

avater

yasaswi gomes   23 June 2020

yasaswi gomes

 65 likes  1117 points

View Profile | My Other Post

Both answers are ‘b’

 

avater

yasaswi gomes   23 June 2020

yasaswi gomes

 65 likes  1117 points

View Profile | My Other Post

I forgot, there need not be anything before +/-. Because it is adding back or taken out of Cashflows. Sometimes, it is advisable to do some research. I made the same error following study formulas. Only for cf analysis hypothesis modelling is required. Similarly, capex depreciation varies from cashflow workings and balance sheet approach. Text books, regarding cf is inconsistent so that authors can make fun of us and earn more cash. 


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